Graham Holdings Co: Form 10-Q for the period ended Jun 30, 2024

This analysis should be read in conjunction with the condensed consolidated financial statements and the notes thereto.

Results of Operations

The Company reported a net loss attributable to common shares of $21.0 million ($4.79 per share) for the second quarter of 2024, compared to income of $122.8 million ($25.89 per share) for the second quarter of 2023.

Items included in the Company’s net loss for the second quarter of 2024:

• $26.3 million in goodwill and intangible asset impairment charges at World of Good Brands (WGB) (after tax impact of $20.6 million, or $4.62 per share);
• $16.4 million in non-operating expenses related to a Voluntary Retirement Incentive Program (VRIP) at the television broadcasting division and the corporate office, and Separation Incentive Programs (SIPs) at other businesses (after tax-impact of $12.2 million, or $2.74 per share);
• $73.5 million in interest expense to adjust the fair value of the mandatorily redeemable noncontrolling interest (after-tax impact of $61.4 million, or $13.77 per share);
• $19.6 million in net gains on marketable equity securities (after-tax impact of $14.6 million, or $3.28 per share);
• $1.1 million in net losses of affiliates whose operations are not managed by the Company (after-tax impact of $0.8 million, or $0.19 per share);
• a non-operating gain of $3.5 million from the sale of certain WGB websites (after-tax impact of $2.7 million, or $0.61 per share); and
• non-operating loss of $0.3 million from the impairment of a cost method investment (after-tax impact of $0.3 million, or $0.06 per share).

Items included in the Company’s net income for the second quarter of 2023:

• a $4.8 million net credit related to a fair value change in contingent consideration from prior acquisitions (after-tax impact of $4.7 million, or $0.98 per share);
• $5.5 million in expenses related to non-operating SIPs at other businesses and the education and television broadcasting divisions (after-tax impact of $4.1 million, or $0.86 per share);
• a $1.2 million credit to interest expense to adjust the fair value of the mandatorily redeemable noncontrolling interest (after-tax impact of $1.2 million, or $0.24 per share);
• $78.6 million in net gains on marketable equity securities (after-tax impact of $57.9 million, or $12.22 per share);
• $8.6 million in net losses of affiliates whose operations are not managed by the Company (after-tax impact of $6.4 million, or $1.34 per share);
• a non-operating gain of $10.0 million on the sale of Pinna (after-tax impact of $7.4 million, or $1.56 per share); and
• non-operating gain of $1.3 million from the write-up and sale of cost method investments (after-tax impact of $1.0 million, or $0.21 per share).

Revenue for the second quarter of 2024 was $1,185.3 million, up 7% from $1,105.0 million in the second quarter of 2023. Revenues increased at education, healthcare and automotive, partially offset by declines at television broadcasting, manufacturing and other businesses. The Company reported operating income of $25.9 million for the second quarter of 2024, compared to $58.1 million for the second quarter of 2023. The decrease in operating results is due to goodwill and intangible asset impairment charges at WGB and declines at television broadcasting, manufacturing and other businesses, partially offset by increases at education, healthcare and automotive.

For the first six months of 2024, the Company recorded net income attributable to common shares of $103.3 million ($23.11 per share), compared to $175.1 million ($36.67 per share) for the first six months of 2023.

Items included in the Company’s net income for the first six months of 2024:

• $26.3 million in goodwill and intangible asset impairment charges at WGB (after tax impact of $20.6 million, or $4.60 per share);
• $16.8 million in non-operating expenses related to a VRIP at the television broadcasting division and the corporate office, and SIPs at other businesses (after tax-impact of $12.5 million, or $2.80 per share);
• $75.4 million in interest expense to adjust the fair value of the mandatorily redeemable noncontrolling interest (after-tax impact of $63.2 million, or $14.13 per share);
• $123.8 million in net gains on marketable equity securities (after-tax impact of $92.1 million, or $20.59 per share);
• $2.6 million in net losses of affiliates whose operations are not managed by the Company (after-tax impact of $1.9 million, or $0.43 per share);
• a non-operating gain of $3.5 million from the sale of certain WGB websites (after-tax impact of $2.7 million, or $0.61 per share); and
• non-operating loss of $0.7 million from the impairment of cost method investments (after-tax impact of $0.6 million, or $0.12 per share).

Items included in the Company’s net income for the first six months of 2023:

• a $4.7 million net credit related to a fair value change in contingent consideration from prior acquisitions (after-tax impact of $4.5 million, or $0.95 per share);
• $9.6 million in expenses related to non-operating SIPs at other businesses and the education and television broadcasting divisions (after-tax impact of $7.2 million, or $1.50 per share);
• $0.3 million in interest expense to adjust the fair value of the mandatorily redeemable noncontrolling interest (after-tax impact of $0.2 million, or $0.05 per share);
• $96.7 million in net gains on marketable equity securities (after-tax impact of $71.2 million, or $14.92 per share);
• $6.8 million in net losses of affiliates whose operations are not managed by the Company (after-tax impact of $5.0 million, or $1.05 per share);
• a non-operating gain of $10.0 million on the sale of Pinna (after-tax impact of $7.4 million, or $1.55 per share); and
• non-operating gain of $3.9 million from the write-up and sales of cost method investments (after-tax impact of $2.9 million, or $0.61 per share).

Revenue for the first six months of 2024 was $2,337.9 million, up 9% from $2,136.5 million in the first six months of 2023. Revenues increased at education, healthcare and automotive, partially offset by declines at television broadcasting, manufacturing and other businesses. The Company recorded operated income of $61.4 million for the first six months of 2024, compared to $85.7 million for the first six months of 2023. The decrease in operating results is due to goodwill and intangible asset impairment charges at WGB and declines at television broadcasting, manufacturing, automotive and other businesses, partially offset by increases at education and healthcare.

Division Results

Education

Education division revenue totaled $422.9 million for the second quarter of 2024, up 5% from $402.2 million for the same period of 2023. Kaplan reported operating income of $35.3 million for the second quarter of 2024, compared to $30.1 million for the second quarter of 2023.

For the first six months of 2024, education division revenue totaled $845.5 million, up 8% from $780.3 million for the same period of 2023. Kaplan reported operating income of $65.9 million for the first six months of 2024, compared to $53.2 million for the first six months of 2023.

A summary of Kaplan’s operating results is as follows:

(in thousands)

Kaplan International includes postsecondary education, professional training and language training businesses largely outside the United States (U.S.). Kaplan International revenue increased 12% and 16% for the second quarter and first six months of 2024, respectively (12% and 14%, respectively, on a constant currency basis). The increase is due largely to growth at Pathways, Australia, UK Professional and Singapore. Kaplan International reported operating income of $25.8 million in the second quarter of 2024, compared to $20.8 million in the second quarter of 2023. The increase is due largely to improved results at Australia, UK Professional and Pathways. Operating income increased to $57.1 million in the first six months of 2024, compared to $42.1 million in the first six months of 2023. The increase is due largely to improved results at Australia, UK Professional, Pathways and Singapore, partially offset by a decline at Languages.

Higher Education includes the results of Kaplan as a service provider to higher education institutions. Higher Education revenue declined 10% and 4% for the second quarter and first six months of 2024, respectively, due primarily to a decrease in the Purdue Global fee recorded and reduced reimbursable expenses. The lower Purdue Global fee recorded was primarily due to timing of academic term starts. Enrollments at Purdue Global, the largest institutional client, increased 3% for the first half of 2024 compared to the first half of 2023. For the second quarter and first six months of 2024 and 2023, Kaplan recorded a portion of the fee from Purdue Global. The Company will continue to assess the fee it records from Purdue Global on a quarterly basis to make a determination as to whether to record all or part of the fee in the future and whether to adjust fee amounts recognized in earlier periods. Higher Education operating results declined in the second quarter and first six months of 2024 due to a lower Purdue Global fee recorded compared to the second quarter and first six months of 2023 and an increase in higher education development costs.

Supplemental Education includes Kaplan’s standardized test preparation programs and domestic professional and other continuing education businesses. Supplemental Education revenue declined 2% for the second quarter and first six months of 2024, driven mostly by softness in Medical Licensure test preparation and publishing activities and Real Estate, offset in part by growth in Insurance, CFA, Architecture and Engineering and MCAT test preparation. Operating results improved in the second quarter and first six months of 2024 due to cost reductions from lower headcount, partially offset by lower revenues.

Kaplan corporate and other represents unallocated expenses of Kaplan, Inc.’s corporate office, other minor businesses and certain shared activities. Kaplan corporate and other expenses increased in the second quarter and first six months of 2024, largely due to increased employee benefit and incentive compensation costs.

Television Broadcasting

A summary of television broadcasting’s operating results is as follows:

(in thousands)

28

Graham Media Group, Inc. owns seven television stations located in Houston, TX; Detroit, MI; Orlando, FL; San Antonio, TX; Jacksonville, FL; and Roanoke, VA, as well as SocialNewsDesk, a provider of social media management tools designed to connect newsrooms with their users. Revenue at the television broadcasting division decreased 3% to $115.5 million in the second quarter of 2024, from $118.8 million in the same period of 2023. The revenue decline is due to a $2.7 million decrease in retransmission revenue and declines in local and digital advertising revenues, partially offset by a $4.8 million increase in political advertising revenue. Operating income for the second quarter of 2024 was down 6% to $31.1 million, from $33.2 million in the same period of 2023, due to lower revenues and increased pension expense, partially offset by lower network fees.

Revenue at the television broadcasting division was down 1% to $228.5 million in the first six months of 2024, from $231.7 million in the same period of 2023. The revenue decline is due to a $2.7 million decrease in retransmission revenue and a decline in local advertising revenue, partially offset by a $6.2 million increase in political advertising revenue; digital advertising revenue was flat in the first six months of 2024. Operating income for the first six months of 2024 was down 2% to $60.8 million, from $61.8 million in the same period of 2023, due to modestly lower revenues and increased pension expense, partially offset by lower network fees and lower overall costs. While per subscriber rates from cable, satellite and OTT providers have grown, overall cable and satellite subscribers are down due to cord cutting, resulting in retransmission revenue net of network fees in 2024 expected to decline compared with 2023, and this trend is expected to continue.

In the second quarter of 2024, the Company offered a VRIP to certain employees at the television broadcasting division. The early retirement program expense for this program will be funded by the assets of the Company’s pension plan; $14.3 million in related non-operating pension expense was recorded in the second quarter of 2024.

Manufacturing

A summary of manufacturing’s operating results is as follows:

(in thousands)

Manufacturing includes four businesses: Hoover, a supplier of pressure impregnated kiln-dried lumber and plywood products for fire retardant and preservative applications; Dekko, a manufacturer of electrical workspace solutions, architectural lighting and electrical components and assemblies; Joyce/Dayton, a manufacturer of screw jacks and other linear motion systems; and Forney, a global supplier of products and systems that control and monitor combustion processes in electric utility and industrial applications.

Manufacturing revenues decreased 14% and 12% in the second quarter and first six months of 2024, respectively. The revenue decline in the second quarter of 2024 is due to lower revenues at Hoover, Forney and Joyce, partially offset by a modest increase in revenues at Dekko. The revenue decline in the first six months of 2024 is due to lower revenues at all of the manufacturing businesses. The revenue decline at Hoover is due largely to a decrease in volumes and overall product demand, particularly for multi-family housing. Revenues declined at Dekko due to lower product demand. Overall, Hoover results included wood gains on inventory sales in the first half of 2024 and 2023, with gains in the first half of 2024 lower than the prior year. For the second quarter of 2024, Hoover results included modest wood losses on inventory sales compared with wood gains on inventory sales in the second quarter of 2023. Manufacturing operating results were down in the second quarter and first six months 2024 due largely to significant declines at Hoover and Dekko, along with declines at Joyce and Forney.

Healthcare

A summary of healthcare’s operating results is as follows:

(in thousands)

Graham Healthcare Group (GHG) provides home health and hospice services in seven states. GHG also provides nursing care and prescription services for patients receiving in-home infusion treatments through its 86.7% interest in CSI Pharmacy Holding Company, LLC (CSI), and other healthcare services. Healthcare revenues increased 30% and 28% for the second quarter and first six months of 2024, respectively, due largely to significant growth at CSI from an expansion of infusion treatment offerings and patient service areas; revenues also grew in home health and hospice services and at the other healthcare businesses. The increase in GHG operating results in the second quarter and first six months of 2024 is due to substantially higher operating results at CSI from significant revenue growth, along with improved results at home health, partially offset by a decline in hospice results and increased pension expense. In January 2022, GHC implemented a pension credit retention program offering a pension credit up to $50,000 per employee, cliff vested after three years of continuous employment for certain existing employees and new employees. Effective April 1, 2024, this program is no longer being offered to new employees.

The Company also holds interests in four home health and hospice joint ventures managed by GHG, whose results are included in equity in earnings of affiliates in the Company’s Condensed Consolidated Statements of Operations. The Company recorded equity in earnings of $3.4 million and $2.3 million for the second quarter of 2024 and 2023, respectively, from these joint ventures. The Company recorded equity in earnings of $6.8 million and $5.0 million for the first six months of 2024 and 2023, respectively.

Automotive

A summary of automotive’s operating results is as follows:

(in thousands)

Automotive includes eight automotive dealerships in the Washington, DC metropolitan area and Richmond, VA: Ourisman Lexus of Rockville, Ourisman Honda of Tysons Corner, Ourisman Jeep Bethesda, Ourisman Ford of Manassas, Toyota of Woodbridge, Ourisman Chrysler-Dodge-Jeep-Ram (CDJR) of Woodbridge and Ourisman Toyota of Richmond, which was acquired on September 27, 2023 from McGeorge Toyota. The automotive group was awarded a Kia Open Point dealership in Bethesda, MD, which commenced operations at the end of December 2023. Christopher J. Ourisman, a member of the Ourisman Automotive Group family of dealerships, and his team of industry professionals operate and manage the dealerships; the Company holds a 90% stake.

Revenues for the second quarter of 2024 increased 18% due largely to the Toyota of Richmond acquisition and the addition of the Kia dealership, as well as sales growth for new vehicles and for services and parts, partially offset by a decline in used vehicle sales. Revenues for the first six months of 2024 increased 24% due largely to the Toyota of Richmond acquisition and the addition of the Kia dealership, as well as sales growth for new and used vehicles and for services and parts. Operating results increased for the second quarter of 2024 due largely to earnings from the Toyota of Richmond acquisition and higher overall gross margins on services and parts, partially offset by lower overall gross margins on new and used vehicles. Operating results declined modestly for first six months of 2024 due largely to lower overall gross margins on new and used vehicles, partially offset by earnings from the Toyota of Richmond acquisition and higher overall gross margins on services and parts.

Other Businesses

A summary of revenue by category for other businesses:

(in thousands)

(1) Includes Society6 and Saatchi Art (formerly Leaf Marketplace) and Framebridge

(2) Includes World of Good Brands (formerly Leaf Media), Code3, Slate, Foreign Policy, Pinna and City Cast

(3) Includes Clyde’s Restaurant Group, Decile and Supporting Cast

Overall, revenue from other businesses declined 4% and 7% in the second quarter and first six months of 2024, respectively. Retail revenue declined in the first half of 2024 largely due to lower revenue at Society6, partially offset by revenue growth at Saatchi Art and Framebridge. Media revenue declined in the first half of 2024 due to lower revenue at WGB and Code3, partially offset by revenue growth at Slate and City Cast. Specialty revenue increased modestly in the first half of 2024 due to revenue growth at Clyde’s Restaurant Group (CRG), Decile and Supporting

Cast. Excluding the former Leaf businesses, revenue from other businesses grew in the second quarter and first six months of 2024.

Overall, operating results at other businesses declined significantly in the first six months of 2024 due to $26.3 million in goodwill and intangible asset impairment charges at WGB and increased pension expense. Excluding these impairment charges and increased pension expense, operating results at other businesses improved modestly in the first half of 2024.

Leaf Group

On June 14, 2021, the Company acquired Leaf Group Ltd. (Leaf), a consumer internet company headquartered in Santa Monica, CA, that builds enduring, creator-driven brands that reach passionate audiences in large and growing lifestyle categories, including fitness and wellness (Well+Good and Livestrong.com), and home, art and design (Saatchi Art and Society6).

In the second quarter of 2023, the Company restructured Leaf into three stand-alone businesses: Society6 (formerly included in Leaf Marketplace), Saatchi Art (formerly included in Leaf Marketplace) and WGB (formerly Leaf Media). The transition process for this restructuring involves various cost reduction initiatives, including elimination of shared services costs and functions; transitioning financial and human resources systems; and rationalizing physical facilities and data centers. In the first and second quarters of 2023, Leaf implemented a SIP to reduce the number of employees, which was funded by the assets of the Company’s pension plan; $2.9 million and $3.9 million in related non-operating pension expense was recorded in the first and second quarters of 2023, respectively. Each of Society6, Saatchi Art and WGB has continued with the transition and cost reduction process, which was largely complete at the end of the second quarter of 2024.

Revenues at Society6 and WGB declined substantially in the second quarter and first six months of 2024. Revenue declines at Society6 are due to declines in traffic, largely driven by a significant decrease in advertising spend, as well as softer demand in the home decor category. Revenue declines at WGB are due to reduced traffic and the soft digital advertising market for programmatic. Revenues at Saatchi Art grew in the second quarter and first six months of 2024. Overall, the Leaf businesses reported significant operating losses in each of the second quarters and first six months of 2024 and 2023.

In the second quarter of 2024, the Company recorded $26.3 million in goodwill and intangible asset impairment charges at WGB, resulting from continued sustained weakness in digital advertising demand. Excluding impairment charges, losses increased modestly at the Leaf businesses in the second quarter and first six months of 2024.

Clyde’s Restaurant Group

CRG owns and operates 13 restaurants and entertainment venues in the Washington, DC metropolitan area, including Old Ebbitt Grill and The Hamilton. Revenue increased in the second quarter and first six months of 2024 due to overall higher guest traffic and modest price increases. Operating results were flat in the second quarter of 2024 and declined in the first six months of 2024. Excluding pre-opening expenses incurred for new restaurants, operating results improved for the second quarter and first six months of 2024. CRG reported an operating profit in each of the second quarters and first six months of 2024 and 2023.

CRG opened a new restaurant in Baltimore, MD in July 2024 and plans to open new restaurants in Washington, DC and Reston, VA in late 2024 and late 2025, respectively.

Framebridge

Framebridge is a custom framing service company, headquartered in Washington, DC, with 23 retail locations, and two manufacturing facilities in Kentucky and New Jersey. In the second quarter of 2024, Framebridge opened one new retail store in Austin, TX. Framebridge plans to open additional stores in the second half of 2024 and continues to actively explore other opportunities for further store expansion.

Revenues increased modestly in the second quarter and first six months of 2024 due to an increase in retail revenue from same-store sales growth and operating additional retail stores compared to the same periods in 2023. Framebridge is an investment stage business and reported significant operating losses in the first six months of 2024 and 2023, with increased losses in the first six months of 2024.

In the first and second quarters of 2024, Framebridge implemented a SIP, which will be funded by the assets of the Company’s pension plan; $0.4 million and $1.0 million in related non-operating pension expense was recorded in the first and second quarters of 2024, respectively.

Other

Other businesses also include Code3, a performance marketing agency focused on driving performance for brands though three core elements of digital success: media, creative and commerce; Slate and Foreign Policy, which publish online and print magazines and websites; and three investment stage businesses, Decile, City Cast and Supporting Cast. Slate, Supporting Cast, City Cast and Decile reported revenue growth in the first six months of 2024, while Code3 reported a revenue decline. Losses from City Cast, Decile, Code3, Foreign Policy and Supporting Cast in the first six months of 2024 adversely affected operating results, while Slate reported an operating profit during this period.

Other businesses also included Pinna, which was sold in June 2023 when the Company entered into a merger agreement with Realm of Possibility, Inc. (Realm), a provider of audio entertainment services, to merge Pinna with Realm in return for a noncontrolling financial interest in the merged entity. In connection with the merger, the Company recorded a $10.0 million non-cash, non-operating gain related to the transaction. The Company’s investment in Realm is reported as an equity method investment.

In the second quarter of 2024, Code3 implemented a SIP to reduce the number of employees, which will be funded by the assets of the Company’s pension plan; $0.6 million in related non-operating pension expense was recorded in the second quarter of 2024. In the first and second quarters of 2023, Code3 implemented a SIP to reduce the number of employees, which was funded by the assets of the Company’s pension plan; $1.2 million and $0.6 million in related non-operating pension expense was recorded in the first and second quarters of 2023.

Corporate Office

Corporate office includes the expenses of the Company’s corporate office and certain continuing obligations related to prior business dispositions. Corporate office expenses in the first half of 2023 benefited from a $4.2 million net credit related to a fair value change in contingent consideration from a prior acquisition.

Employee Benefit Plan Changes

Effective January 1, 2024, the Company’s defined benefit pension plan was amended to provide many of the current employees who are current plan participants with an increased pension benefit, and to provide certain current employees from several business units with a new pension benefit offering. The increased and new pension benefits will be funded by the assets of the Company’s pension plan. As a result of these changes, the Company’s matching contribution to certain of its 401(k) Savings Plans was eliminated.

Equity in Earnings (Losses) of Affiliates

At June 30, 2024, the Company held an approximate 18% interest in Intersection Holdings, LLC (Intersection), a company that provides digital marketing and advertising services and products for cities, transit systems, airports, and other public and private spaces; a 49.9% interest on a fully diluted basis in N2K Networks, a cybersecurity workforce intelligence company; and a 42.2% interest on a fully diluted basis in Realm. The Company also holds interests in several other affiliates, including a number of home health and hospice joint ventures managed by GHG and two joint ventures managed by Kaplan. Overall, the Company recorded equity in earnings of affiliates of $2.6 million for the second quarter of 2024, compared to losses of $6.1 million for the second quarter of 2023. These amounts include $1.1 million and $8.6 million in net losses for the second quarter of 2024 and 2023, respectively, from affiliates whose operations are not managed by the Company.

The Company recorded equity in earnings of affiliates of $4.9 million for the first six months of 2024, compared to losses of $1.5 million for the first six months of 2023. These amounts include $2.6 million and $6.8 million in net losses for the first six months of 2024 and 2023, respectively, from affiliates whose operations are not managed by the Company.

Net Interest Expense and Related Balances

The Company incurred net interest expense of $89.3 million and $106.4 million for the second quarter and first six months of 2024, respectively, compared to $10.2 million and $23.3 million for the second quarter and first six months of 2023, respectively.

The Company recorded interest expense of $73.5 million and $75.4 million in the second quarter and first six months of 2024, respectively, to adjust the fair value of the mandatorily redeemable noncontrolling interest at GHG. The significant adjustment recorded in the first half of 2024 is largely related to a substantial increase in the estimated fair value of CSI. The Company recorded a credit to interest expense of $1.2 million in the second quarter of 2023 and interest expense of $0.3 million in the first six months of 2023, respectively, to adjust the fair value of the mandatorily redeemable noncontrolling interest at GHG.

Excluding these adjustments, the increase in net interest expense relates primarily to higher debt balances, higher interest rates on the Company’s variable debt, and increased floor plan interest expense.

At June 30, 2024, the Company had $834.8 million in borrowings outstanding at an average interest rate of 6.4%, and cash, marketable equity securities and other investments of $1,009.6 million. At June 30, 2024, the Company had $132.2 million outstanding on its $300 million revolving credit facility.

Non-operating Pension and Postretirement Benefit Income, net

The Company recorded net non-operating pension and postretirement benefit income of $24.7 million and $67.1 million for the second quarter and first six months of 2024, respectively, compared to $29.8 million and $61.7 million for the second quarter and first six months of 2023, respectively.

In the second quarter of 2024, the Company recorded $14.8 million in expenses related to a VRIP at the television broadcasting division and the corporate office and $1.6 million in expenses related to non-operating SIPs at other businesses. In the first quarter of 2024, the Company recorded $0.4 million in expenses related to a non-operating SIP at other businesses.

In the second quarter of 2023, the Company recorded $5.5 million in expenses related to non-operating SIPs at other businesses and the education and television broadcasting divisions. In the first quarter of 2023, the Company recorded $4.1 million in expenses related to non-operating SIPs at other businesses.

Gain on Marketable Equity Securities, net

Overall, the Company recognized $19.6 million and $123.8 million in net gains on marketable equity securities in the second quarter and first six months of 2024, respectively, compared to $78.6 million and $96.7 million in net gains on marketable equity securities in the second quarter and first six months of 2023, respectively.

Other Non-Operating Income

The Company recorded total other non-operating income, net, of $1.8 million for the second quarter of 2024, compared to $15.8 million for the second quarter of 2023. The 2024 amounts included a gain of $3.5 million on the sale of certain WGB websites, and other items; partially offset by $1.7 million in foreign currency losses and a $0.3 million impairment on a cost method investment. The 2023 amounts included a non-cash gain of $10.0 million on the sale of Pinna; $2.2 million in gains related to the sale of businesses and contingent consideration; $1.6 million in foreign currency gains; a $1.3 million fair value increase on a cost method investment, and other items.

The Company recorded total other non-operating income, net, of $3.4 million for the first six months of 2024, compared to $18.9 million for the first six months of 2023. The 2024 amounts included a gain of $3.5 million on the sale of certain WGB websites; $0.9 million in gains related to the sale of businesses and contingent consideration, and other items; partially offset by $1.1 million in foreign currency losses and a $0.7 million impairment on cost method investments. The 2023 amounts included a non-cash gain of $10.0 million on the sale of Pinna; $3.2 million in gains related to the sale of businesses and contingent consideration; a $3.1 million fair value increase on cost method investments; a $0.8 million gain on sales of cost method investments; $0.1 million in foreign currency gains, and other items.

Provision for Income Taxes

The Company’s effective tax rate for the first six months of 2024 and 2023 was 30.9% and 25.6%, respectively. The Company’s effective tax rate for the first six months of 2024 is based on the estimated full year 2024 effective tax rate, which includes the adverse impact of the permanent differences related to the interest expense recorded to adjust the fair value of the mandatorily redeemable noncontrolling interest at GHG and goodwill and intangible asset impairment charges.

(Loss) Earnings Per Share

The calculation of diluted (loss) earnings per share for the second quarter and first six months of 2024 was based on 4,400,745 and 4,442,214 weighted average shares outstanding, respectively, compared to 4,712,626 and 4,744,076, respectively, for the second quarter and first six months of 2023. At June 30, 2024, there were 4,410,542 shares outstanding. On May 4, 2023, the Board of Directors authorized the Company to acquire up to 500,000 shares of its Class B common stock; the Company has remaining authorization for 167,617 shares as of June 30, 2024.

Other

The Company continuously assesses relevant events and circumstances to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In the second quarter of 2024, the Company performed an interim impairment review at the WGB reporting unit.

As a result of continued sustained weakness in digital advertising demand resulting in substantial revenue declines and continued significant operating losses at WGB, the Company recorded a $7.5 million goodwill impairment charge at WGB. After the impairment charge, no goodwill remains at the WGB reporting unit, which is included in other businesses. Additionally, the Company recorded a $18.8 million intangible asset impairment charge at WGB.

It is possible that impairment charges, which may be material, could occur in the future, given changes in market conditions and the inherent variability in projecting future operating performance.

Financial Condition: Liquidity and Capital Resources

The Company considers the following when assessing its liquidity and capital resources:

(In thousands)

Cash generated by operations is the Company’s primary source of liquidity. The Company maintains investments in a portfolio of marketable equity securities, which is considered when assessing the Company’s sources of liquidity. An additional source of liquidity includes the undrawn portion of the Company’s $300 million revolving credit facility, amounting to $167.8 million at June 30, 2024 and the undrawn $50.0 million delayed draw term loan at the automotive subsidiary.

During the first six months of 2024, the Company’s cash and cash equivalents decreased by $29.2 million, due to share repurchases, capital expenditures, and dividend payments, which was offset by operating cash flow and net proceeds from the vehicle floor plan payable and net borrowings. In the first six months of 2024, the Company’s borrowings increased by $22.9 million, primarily due to additional borrowings under the revolving credit facility, partially offset by repayments under the revolving credit facility, term loan and commercial notes at the automotive subsidiary.

As of June 30, 2024 and December 31, 2023, the Company had money market investments of $9.0 million and $5.6 million, that are included in cash and cash equivalents. At June 30, 2024, the Company held approximately $91 million in cash and cash equivalents in businesses domiciled outside the U.S., of which approximately $8 million is not available for immediate use in operations or for distribution. Additionally, Kaplan’s business operations outside the U.S. retain cash balances to support ongoing working capital requirements, capital expenditures, and regulatory requirements. As a result, the Company considers a significant portion of the cash and cash equivalents balance held outside the U.S. as not readily available for use in U.S. operations.

At June 30, 2024, the fair value of the Company’s investments in marketable equity securities was $813.4 million, which includes investments in the common stock of four publicly traded companies. There were no purchases or sales of marketable equity securities during the first six months of 2024. At June 30, 2024, the unrealized gain related to the Company’s investments totaled $587.6 million.

In May 2024, the Company entered into a convertible promissory note agreement to loan N2K Networks $2.0 million. The convertible promissory note bears interest at a rate of 12% per annum and, subject to conversion provisions, all unpaid interest and principal are due by May 2027.

In April 2023, the Company entered into a term note agreement to loan Intersection $30.0 million at an interest rate of 9% per annum. The principal and interest on the note are payable in monthly installments over 5 years with the final payment due by May 2028. The outstanding balance on this loan was $27.7 million as of June 30, 2024.

The Company had working capital of $731.2 million and $619.6 million at June 30, 2024 and December 31, 2023, respectively. The Company maintains working capital levels consistent with its underlying business requirements and consistently generates cash from operations in excess of required interest or principal payments.

At June 30, 2024 and December 31, 2023, the Company had borrowings outstanding of $834.8 million and $811.8 million, respectively. The Company’s borrowings at June 30, 2024 were mostly from $400.0 million of 5.75% unsecured notes due June 1, 2026, $132.2 million in outstanding borrowings under the Company’s revolving credit facility, a term loan of $143.7 million, and real estate and capital term loans of $132.6 million at the automotive subsidiary. The Company’s borrowings at December 31, 2023 were mostly from $400.0 million of 5.75% unsecured notes due June 1, 2026, $97.9 million in outstanding borrowings under the Company’s revolving credit facility, a term loan of $147.5 million, and real estate and capital term loans of $137.6 million at the automotive subsidiary. The interest on the $400.0 million of 5.75% unsecured notes is payable semiannually on June 1 and December 1.

During the six months ended June 30, 2024 and 2023, the Company had average borrowings outstanding of approximately $826.9 million and $738.3 million, respectively, at average annual interest rates of approximately 6.4% and 5.9%, respectively. During the six months ended June 30, 2024 and 2023, the Company incurred net interest expense of $106.4 million and $23.3 million, respectively. Included in the interest expense for the six months ended June 30, 2024 and 2023 is $75.4 million and $0.3 million, respectively, to adjust the fair value of the mandatorily redeemable noncontrolling interest (see Note 7 and 8).

On April 2, 2024, Standard & Poor’s affirmed the Company’s credit rating and maintained the outlook as Stable. On August 17, 2023, Moody’s affirmed the Company’s credit rating and maintained the outlook as Stable.

The Company’s current credit ratings are as follows:

The Company expects to fund its estimated capital needs primarily through existing cash balances and internally generated funds, and, as needed, from borrowings under its revolving credit facility. As of June 30, 2024, the Company had $132.2 million outstanding under the $300 million revolving credit facility. In management’s opinion, the Company will have sufficient financial resources to meet its business requirements in the next 12 months, including working capital requirements, capital expenditures, interest payments, potential acquisitions and strategic investments, dividends and stock repurchases.

In summary, the Company’s cash flows for each period were as follows:

(In thousands)

Operating Activities. Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. The Company’s net cash flow provided by operating activities were as follows:

(In thousands)

Net cash provided by operating activities consists primarily of cash receipts from customers, less disbursements for costs, benefits, income taxes, interest and other expenses.

For the first six months of 2024 compared to the first six months of 2023, the decrease in net cash provided by operating activities is primarily driven by lower net income, net of non-cash adjustments, partially offset by the changes in operating assets and liabilities. Changes in operating assets and liabilities were driven by a significant increase in the value of the mandatorily redeemable noncontrolling interest, offset by a decrease in customer collections.

Investing Activities. The Company’s net cash flow used in investing activities were as follows:

(In thousands)

Capital Expenditures. The amounts reflected in the Company’s Condensed Consolidated Statements of Cash Flows are based on cash payments made during the relevant periods, whereas the Company’s capital expenditures for the first six months of 2024 and 2023 disclosed in Note 15 to the Condensed Consolidated Financial Statements include assets acquired during the period. The Company estimates that its capital expenditures will be in the range of $95 million to $105 million in 2024.

Loan to related party. In May 2024, the Company entered into a convertible promissory note agreement to loan N2K Networks $2.0 million. The convertible promissory note bears interest at a rate of 12% per annum and, subject to conversion provisions, all unpaid interest and principal are due by May 2027. In April 2023, the Company entered into a term note agreement to loan Intersection $30.0 million at an interest rate of 9% per annum. The principal and interest on the note are payable in monthly installments over 5 years with the final payment due by May 2028. The outstanding balance on this loan was $27.7 million as of June 30, 2024.

Net proceeds from sale of marketable equity securities. There were no purchases or sales of marketable equity securities during the first six months of 2024. During the first six months of 2023, the Company sold marketable equity securities that generated proceeds of $62.0 million and purchased $4.6 million of marketable equity securities.

Financing Activities. The Company’s net cash flow used in financing activities were as follows:

(In thousands)

Common Stock Repurchases. During the first six months of 2024, the Company purchased a total of 68,786 shares of its Class B common stock at a cost of approximately $50.0 million, including commissions and accrued excise tax of $0.5 million. On May 4, 2023, the Board of Directors authorized the Company to acquire up to 500,000 shares of its Class B common stock. The Company did not announce a ceiling price or time limit for the purchases. At June 30, 2024, the Company had remaining authorization from the Board of Directors to purchase up to 167,617 shares of Class B common stock.

Borrowings and Vehicle Floor Plan Payable. In the first six months of 2024, the Company made additional borrowings on the $300 million revolving credit facility. In the first six months of 2023, the Company made repayments on the $300 million revolving credit facility. In the first six months of 2024 and 2023, the Company used vehicle floor plan financing to fund the purchase of new, used and service loaner vehicles at its automotive subsidiary. The proceeds from the vehicle floor plan payable fluctuates with changes in the amount of vehicle inventory held by the automotive dealerships.

Dividends. The quarterly dividend rate per share was $1.72 and $1.65 for the first six months of 2024 and 2023, respectively. The Company expects to pay a dividend of $6.88 per share in 2024.

There were no other significant changes to the Company’s contractual obligations or other commercial commitments from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023.

Forward-Looking Statements

All public statements made by the Company and its representatives that are not statements of historical fact, including certain statements in this report, in the Company’s Annual Report on Form 10-K and in the Company’s 2023 Annual Report to Stockholders, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on expectations, forecasts, and assumptions by the Company’s management and involve a number of risks, uncertainties, and other factors that could cause actual results to differ from those stated, including, without limitation, comments about expectations related to acquisitions or dispositions or related business activities, the Company’s business strategies and objectives, the prospects for growth in the Company’s various business operations, the Company’s future financial performance, and the risks and uncertainties described in Item 1A of the Company’s Annual Report on Form 10-K. Accordingly, undue reliance should not be placed on any forward-looking statement made by or on behalf of the Company. The Company assumes no obligation to update any forward-looking statement after the date on which such statement is made, even if new information subsequently becomes available.

The Company is exposed to market risk in the normal course of its business due primarily to its ownership of marketable equity securities, which are subject to equity price risk; to its borrowing and cash-management activities, which are subject to interest rate risk; and to its foreign business operations, which are subject to foreign exchange rate risk. The Company’s market risk disclosures set forth in its 2023 Annual Report filed on Form 10-K have not otherwise changed significantly.

(a) Evaluation of Disclosure Controls and Procedures

An evaluation was performed by the Company’s management, with the participation of the Company’s Chief Executive Officer (principal executive officer) and the Company’s Chief Financial Officer (principal financial officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of June 30, 2024. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as designed and implemented, are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.

(b) Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.